Proposed pension bond

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Attica

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Company is winding up defined benefit pension scheme with underfunding around 35%. They propose to buy annuities for existing pensioners using mix of conventional annuity bonds and Irish Amortisation bonds (govt. bonds). The conventional bonds will guarantee around 5k of pension, the IABs will cover any higher amounts but carry a risk if any designated European govt. bond is defaulted on (think Greece/Spain). This is very worrying as such a default or reduction in value will mean a decrease or stoppage of pension over 5k.

Does this sound reasonable to AAM? It may be the best the company can do but after a lifetime of working, 5k assured pension is not a lot. Are IABs likely to reduce in value over the next 10 years or so?
 
If the scheme is 35% underfunded then the proposal seems to be trying to share the pain between both current members and retired members. From your post I assume that current pensioners are being paid out of the fund rather than the scheme having offloaded the liability by buying annuities.
If the Trustees were to close the scheme and now buy conventional annuities in respect of retired members then this would deplete the scheme assets further, since conventional annuities are largely priced off German bunds ( thus more costly).
So I am assuming that what is being proposed it that annuities will be bought for retired members ( offloading the liability) but that such will be a combination of conventional annuity and sovereign annuity (an annuity based on say Irish Government Bond rates). This combination will be less costly but does transfer an element of risk to retired members in that their sovereign annuity element could be reduced in the future if the Irish Government defaulted at some time in the future ( as often suggested by Sinn Fein, United(sic) Left Alliance and the other crazies).
The equity here is that all members take some pain, since current members will also suffer a loss of pension value. If retired members were to be provided with conventional (more expensive) annuities, then the underfunding would be much worse for current members.
Unfortunately, due to increased longevity, lower bond yields and regulations forcing Trustees to invest pension funds more conservatively, this is an issue facing most DB schemes (Aer Lingus, Independent News & Media, Bank of Ireland etc). This is not an issue facing civil and public servants (including those who make the rules that are so impacting private sector schemes) since their pensions are unfunded and simply paid out of Government revenue.

I hope this helps.
 
Thanks, Conan. Irish Life is the chosen vehicle for the mix of conventional and Govt. annuities on offer to existing retirees and their leaflet draws attention to the risks in the IABs, citing default in certain European states as leading to possible reduction or cessation of that part of the pension covered by IABs.

I wouldn't deny the public servants their pensions except for the bloated top ranks, at least those who didn't do the job of minding the State. The ordinary worker deserves a reasonable pension.
 
If memory serves me right, I think the Irish Life sovereign annuity is based on a mix of of European Gov't bonds ( not just Irish Gov't bonds) so the default risk could be less.
I guess that a sovereign annuity, even with a possible default risk, is better than an absolute 35% reduction in a conventional annuity.
 
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